Florgale Uniforms Pty Ltd (rec & man apptd) (in liq) v Orders [2004] VSC 65

Supreme Court of Victoria|2004-10-27|Before: DODDS-STREETON J.

RECEIVERS AND MANAGERS - Duty of care in exercising power of sale - Sale of special purpose apparel and linen - Whether breach by auctioning stock rather than closing down sale to existing customer base -Whether breach in process by failure to compare and evaluate different methods of realisation - Whether failure appropriately to prepare stock for auction and adequately advertise auction - Whether breach by failing to accept favourable pre-auction offer for stock prior to its withdrawal - Corporations Law s.420A - Whether right of action conferred - Application to guarantors and `third-party' mortgagors - Breach of duty not established. Corporations Law s.420A; Corporations Law s.423; Corporations Law s.1234. GE Capital Australia v Davis [2002] NSWSC 1146; Jeogla v ANZ [1999] NSWSC 563; Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; Skinner v Jeogla [2001] NSWCA 15; ; ;

In this proceeding, certain corporations (now in liquidation), and the related companies and individuals who secured or guaranteed the payment of their liabilities to the National Australia Bank ("NAB") pursuant to a number of debentures, seek relief against the NAB and Mr Malcolm Orders, the receiver and manager it appointed pursuant to the debentures.

The plaintiff corporations conducted a business of manufacturing health industry apparel, linen, sporting apparel and corporate uniforms. They allege that the receiver breached his duty pursuant to s.232 and s.420A of the Corporations Law in realising specialised stock by auction, rather than by sale to the existing customers of the business. They further allege that the NAB is liable for aiding and abetting the receiver's breach, or because the receiver was its agent in relation to the relevant conduct. Stock valued at approximately $2 million in the Florgale Group's books, which had an estimated auction realisation value of approximately $337,000 was sold for approximately $100,000. The plaintiffs argue that, but for the breaches of duty, the corporate apparel stock alone would have raised over $800,000, and there would have been a sufficient surplus from the realisation of the corporations' assets to discharge the debt of approximately $1 million owed to the NAB, without recourse to the guarantees and mortgages. The NAB, by counterclaim, seeks judgment against the guarantors and mortgagors for the amount of the Florgale Group's debt and seeks to apply the proceeds of sale of the mortgaged properties to its reduction.

The plaintiffs originally alleged four specific instances of breach of duty in realising the companies' assets. They were: forfeiting the opportunity to sell the business as a going concern; failing to accept an advantageous offer, made prior to auction, to purchase certain stock before the offer was withdrawn; the nature of the sale of a particular lot of garments (the VCFL shorts); and conducting a sale by auction of the stock, materials and work in progress.

At the commencement of trial, the issues in dispute were reduced. The plaintiffs abandoned the claim based on failure to sell the business as a going concern (hitherto their principal claim) and the claim based on the sale of a specific lot of garments (the VCFL shorts). The plaintiffs, by leave, filed and served a further amended statement of claim dated 9 February 2004, which reflected the reduction of their claims.

The first plaintiff, Florgale Uniforms Pty Ltd ("Florgale Uniforms"), the second plaintiff, Florgale Uniforms NSW Pty Ltd (receiver and manager appointed) (in liquidation) ("Florgale Uniforms NSW") and the third plaintiff, Professional Uniforms Pty Ltd (receiver and manager appointed) (in liquidation) ("Professional Uniforms") are all companies in liquidation, with a receiver and manager appointed.[1] They collectively constitute the "Florgale Group".

The fourth plaintiff, Group Textile Enterprises Pty Ltd ("Group Textile") is and was the trustee of the John W Burnes Family Trust. Group Textile was the registered proprietor of a property situated at 5A Union Street, Brunswick ("the Union Street property"). The Union Street property was one of the properties from which the Florgale Group's business was conducted.

The fifth plaintiff, Thurston Nominees Pty Ltd ("Thurston") was the registered proprietor of a property situated at 11 Little Gold Street, Brunswick ("the Little Gold Street property"). The Little Gold Street property was also a property from which the Florgale Group's business was conducted.

The Union Street property was sold on or about 3 March 1999. The net proceeds of sale were $346,648. The Little Gold Street property was sold on 19 March 1999. The net proceeds of sale were $155,013.82.

The proceeds of sale of the properties were deposited in a NAB account. The disposition of the fund is dependent on the outcome of this proceeding.

The sixth plaintiff, Mr John Burnes, was the managing director of the companies in the Florgale Group and of Group Textile and Thurston. In 1989, he executed a personal guarantee of the liabilities of the Florgale Group companies under a finance facility granted by the Bank of New Zealand in January 1989 ("the BNZ finance facility").

The seventh plaintiff, Mrs Colette Burnes, is the former wife of John Burnes. In 1989, she executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.

The eighth plaintiff, Mr David Burnes, is the brother of John Burnes. David Burnes was a director of certain companies in the Florgale Group and of Thurston. He was the general manager and production manager of the Florgale Group. In 1989, David Burnes executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.

The ninth plaintiff is the estate of Ms Constance Mary Ryan, deceased. In 1989, Ms Ryan executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.

The tenth plaintiff, Mrs Elizabeth Burnes, is the wife of David Burnes, who, in 1992 executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.

The first defendant, Malcolm Orders, is a chartered accountant, registered liquidator, official liquidator and insolvency practitioner who, on 5 November 1998, whilst a partner of the firm Bird Cameron Partners ("Bird Cameron"), was appointed receiver of the companies in the Florgale Group.

The second defendant and plaintiff by counterclaim, the NAB, in 1992 succeeded to a number of debenture charges granted by companies in the Florgale Group, and to mortgages granted by Group Textile and Thurston in favour of BNZ in 1989 to secure financial accommodation granted by BNZ to the Florgale Group.

The plaintiffs' principal contention was that the receiver breached his duty by conducting a sale of the stock by auction on 15 December 1998, rather than selling it by conducting a large-scale "closing-down" sale targeting the Florgale Group's existing customer base.

The plaintiffs' closing written submissions relevantly state:

"The principal aspect of the plaintiffs' case in relation to the sale of assets is therefore in relation to the manner in which the stock of the company - made up garments, fabrics, work in progress was realised. The plaintiffs' case in this respect involves two principal contentions. First, a primary case that from about mid-November 1998, the receiver should have given consideration to affirming the stock to the existing customer base of the company, at discounts from the usual wholesale prices, and the receiver should not have immediately decided simply to sell the stock at auction. The stock of the Florgale Group was special purpose stock - including corporate apparel - which has a quite different market to general fashion garments. This should have been clearly apparent to Mr Orders, given his prior experience with the group in relation to the Quick Evaluation Report, and the advice given to him by the directors of the group as to the special nature of their stock. For stock of this nature, the existing customers would, as a matter of common sense, quite obviously be willing to pay a higher price than general purchasers at auction, and this has been borne out in the evidence of former customers of the Florgale Group. It is also clear that sale of stock of this nature by auction is universally regarded as the option of last resort, which will realise less than other methods of sale."

The plaintiffs thus argued that the best method of disposal for the Florgale Group's special purpose stock (assuming that the Florgale Group's business could not be sold as a going concern) was to approach the existing customer base. In support of that contention, and their claim for loss and damages, they called a number of former customers as witnesses, in order to establish that there was a demand amongst existing customers for the auctioned stock, which would have led to significant purchases and a better net return if a closing-down sale at a discount had been conducted.

Mr Collinson, counsel for the plaintiffs, argued that the receiver should have conducted a large-scale closing-down sale at a discount to existing customers, rather than proceeding directly to auction. He argued that the failure to conduct a closing-down sale was the result of an antecedent breach in "process", in that Mr Orders did not conduct any or any proper analysis of the different options available for disposing of the stock for the best price possible. The plaintiffs argued that instead, Mr Orders first concentrated on the sale of the business as a going concern and, upon the failure of that aim, immediately decided to sell the stock by auction. They argued that Orders' failure to undertake the analytical process required of a receiver was evidenced by his failure to prepare any budget or documentary analysis comparing the likely costs and benefits of an auction with the costs and benefits of conducting a "closing-down" sale aimed at the Florgale Group's existing customers.

Mr Collinson argued that the receiver should first have pursued the undisputed primary objective of selling the Florgale Group's business as a going concern concurrently with a concerted strategy of sales at a discount to existing customers. However, conceding that there may have been some tension between the two objectives, he argued in the alternative that upon the failure to sell the business as a going concern, the receiver should have considered and adopted the strategy of mounting a large "closing down" discount sale of the entire Florgale stock to the existing customers. Further, the receiver should have prepared a spreadsheet analysis comparing the likely costs and benefits of a closing-down sale to those of an auction.

The plaintiffs ultimately did not dispute that sales of stock occurred during the pre-auction period. However, they contended that such sales were merely "passive", rather than "pro-active" sales which were part of a concerted strategy.

The plaintiffs conceded that an auction of the Florgale Group's plant and equipment would have been necessary in any event, as would a smaller auction of any stock which was not sold to existing customers in the hypothetical closing-down sale. However, they contended that auction was the method of last resort for the disposal of special purpose stock, and should not have been adopted this case.

In support of the argument that a major closing-down sale to existing customers at a discount should have been adopted, and would have produced better results, the plaintiffs relied on

(a) the evidence of certain customers of their demand for Florgale Group stock, and their readiness to purchase it at a discount on wholesale price;

(b) the opinion evidence of Mr John Burnes on the returns he believed would have achieved from the strategy of a sale of the entire stock to existing customers within a six week period, at discounts recommended by him.

The plaintiffs contended that not only was an auction the wrong method of realisation, but that the auction ultimately conducted by Taylor Lockwood on 15 December 1998 was "prepared, advertised and conducted badly, so that the auctioned stock realised only a small fraction of what it was worth and what it would have realised had the auction been properly conducted." The plaintiffs complained that the advertising was confined to three states, although Florgale Group conducted a national business. Further, customers were not notified of the auction and stock was bundled into auction lots which did not contain a range of sizes and styles attractive to existing customers or purchasers of corporate uniforms.

It is undisputed that the receiver's primary objective, supported by the Messrs Burnes, was to sell the business as a going concern.

However, the plaintiffs contended that during the receivership Messrs John and David Burnes on various occasions warned and advised Orders or his staff-member Quin, that the Florgale Group's specialist stock should be sold to the existing customers and should not be sold at auction. They also contended that the Messrs Burnes expressed concern about the level of sales occurring during the trade-on period and prior to auction, complained of the preparation of lots and other arrangements for auction, and advised the receiver to remove corporate logos from logoed corporate uniform stock prior to sale. They claim that such advice was rebuffed on each occasion by Mr Orders or by Mr David Quin, a member of the receiver's staff who was more or less permanently present at the Florgale Group premises throughout the receivership during the period prior to the auction on 15 December 1998.

The Messrs Burnes gave evidence that the receiver or Quin responded to their complaints or recommendations by excluding them from discussions and or stating that the disposal of stock was none of their business. They testified that at the outset of the receivership, at a meeting on 5 November 1998, Orders expressly prohibited them from making any contact with customers or from concluding any sales at all without his written authority, and handed them a document to that effect.

The Messrs Burnes also testified that on subsequent occasions, John or David Burnes again urged that efforts be made to sell stock to customers, advised against auction, and protested at the bundling of the stock for auction, but that the receiver rejected the advice or recommendations.

Mr Garde, senior counsel for the defendants, submitted that the plaintiff's principal complaint concerning the method of disposal of stock was based on hindsight. It did not take account of the receiver's fundamental obligation to balance the costs of a particular mode of disposal against the likely returns, and to weigh all relevant risks, when determining the mode of realisation of assets. He argued that the ultimate goal of the receiver is, (subject to the general law and statutory duties owed to the mortgagor), to maximise the returns to the secured creditor. Although a higher sale price might be achieved by a particular method of disposal, the associated costs might outweigh it.

He submitted that I should reject the Messrs Burnes' testimony that during the receivership they complained of the receiver's approach to the sale of stock, advanced the proposal of a large closing-down sale at a discount aimed at existing customers and objected to the decision to sell the stock by auction. Similarly, he contended that I should reject their testimony that they complained of the level of sales of stock achieved prior to auction, the method of compilation of stock into lots for auction and the advertising and notification of prospective bidders for the auction. Mr Garde also submitted that I should not accept the Messrs Burnes' testimony that they advised that the logoes be removed from logoed corporate uniform stock.

Mr Garde argued that in so far as the plaintiff's case relied on the disparity between the amount realised at auction and the value ascribed to the stock in the Florgale Group's financial statements, it was fundamentally misconceived. The Florgale Group's practice of valuing the stock at wholesale prices less 20% was erroneous, because it included a profit component. Instead, the valuation method of cost of goods (if lower than net realisable value) should have been adopted in the financial statements.

Further, he submitted that the Florgale Group had been making losses and its revenue was declining for approximately five successive years. It had fundamental problems of excessive stock holdings with inflated book values. There was a pattern of increasing stock holdings, while the companies' operations were increasingly unprofitable. Those circumstances fortified the conclusion that the stock was overvalued in the Florgale Group's books.

There had also been unsuccessful efforts to sell the entire business for less than the value ascribed to the stock. By October 1998, the directors considered the Florgale Group companies to be insolvent. The appointment of administrators, and the subsequent appointment of a receiver, were public events, which rendered the realisation of stock more difficult. The trade knew of the Florgale Group's insolvency.

Mr Garde argued that the large closing-down sale discount aimed at existing customers proposed by the plaintiffs was entirely unrealistic. It ignored the trading history of the business both prior to receivership and during the receivership up to the closure of the business. The receiver had sold to existing customers at a discount but had sustained trading losses. Contrary to the plaintiffs' assertion, the remaining staff had continued to make sales at a discount both before and after the closure of the business, although the sales of items which required continuity of supply were reduced. The plaintiffs' proposal did not take account of the risks, the practical limitations and significant costs which would be entailed. By the time the receivership commenced, the administrator had already reduced the Florgale staff from 34 persons to about 17. The remaining staff would not have been capable of selling and despatching the Florgale Group's entire holding stock (which was equivalent to the quantity usually sold within the space of about a year) within a concentrated six week period. It would have been necessary to hire additional staff, and (depending on the time required to sell all the stock) to commit to additional rental for either the existing or alternative premises.

The defendants argued that in order to sell stock by the method of a closing-down sale at a discount to existing customers advocated by the plaintiffs, it would have been necessary to continue to run the business, which was incurring estimated losses of $43,000 from 11 November 1998 to end of November 1998. Because of the approaching end of year, the latest possible auction date for 1998 was 15 December 1998. If the auction did not take place then, it would have to be delayed until next February at the earliest. The losses of running the business over January and February, including rental, would then have to be funded. The Messrs Burnes, and other related parties, were not willing to cover any losses incurred by keeping the business open. The incurring of additional costs had to be assessed against the risk that the return would not justify them. A better outcome was not, in any event, guaranteed.

Mr Garde submitted that receiver engaged Taylor Lockwood, (an experienced and reputable firm of auctioneers previously retained by the voluntary administrator) to value the stock and to advise on the preparation and conduct of the auction. He accepted Taylor Lockwood's recommendations in relation to the timing, advertising and conduct of the auction. In particular, the receiver accepted Taylor Lockwood's advice for two substantial advertisements in "The Age" on successive Saturdays. There was no evidence to suggest that the entire customer base should be notified of an auction and the receiver had already instructed staff, including the Messrs Burnes, to contact existing customers who were likely to be interested in purchasing stock at a discount. Further, about 768 auction brochures or flyers were distributed to recipients across Victoria, New South Wales and South Australia. Although there were Florgale Group retailers and distributors listed in other states, no evidence or statistics established the proportion of its sales achieved outside Victoria, New South Wales and South Australia, other than for Mr John Burnes' estimate, based on the figures for a three month's period of operation. There was no basis on which to conclude that national advertising was warranted. Further, the auction catalogue revealed lots containing assorted sizes and styles, contrary to the plaintiffs' allegations.

Mr Garde ultimately submitted that the cost versus benefit analysis of the methods of realisation was a matter for the judgment of the receiver, which he had exercised on reasonable grounds in all the prevailing circumstances.

The defendants contended that the auction was well conducted and well-attended. There were 130 registered bidders and about 200 persons who attended. Thirty-two staff days by Taylor Lockwood staff were involved in the preparation and conduct of the auction. Two auctions were conducted within the day. The plant and equipment was auctioned first, followed by the stock. There was a large number of purchasers. Although the proceeds of the auction were significantly less than estimated, that was not due to any flaw in the advertising or conduct of the auction.

The plaintiffs' second claim is that the receiver breached his duty by failing to transmit an immediate acceptance of an advantageous but conditional offer made by Yakka Pty Ltd ("Yakka"), a competitor of the Florgale Group, to purchase specified Coles corporate uniform stock for $100,000. The Yakka offer was received late in the afternoon of Friday, 27 November 1998. The Yakka offer was stated to be open for seven days, but it was prematurely withdrawn on Monday, 30 November 1998. It was subject to conditions, including a physical inspection. The Coles stock was subsequently included in, and sold at, the auction on 15 December 1998. The plaintiffs' closing written submissions stated:

"The other aspect of the plaintiffs' case relates to the specific failure of the receiver to accept an offer from Yakka to purchase Coles stock. On 27 November, 1998, after the decision had been made to close the business, Yakka made a formal offer to purchase the Coles stock for $100,000. The stock had been given an auction realisation value of $6,879. Despite the fact that the price offered was over 14 times the auction realisation value, and the advice from John Burnes that the offer should have been accepted immediately, it was not, and the offer was withdrawn."

The defendants argued that in circumstances where there was no apparent urgency and the offer was subject to conditions, it was unrealistic to contend that the receiver breached his duty by failing to accept the offer within the space of a working day.

The plaintiffs' third claim is based on the conversion of certain computer equipment valued at approximately $4,000, held by Group Textile pursuant to a hire-purchase agreement, which was lost during the course of the receivership. The defendants accepted liability for the conversion, but contended that the damages were limited to the value of the goods. The plaintiffs contended that damages included the liability of approximately $18,000 under the hire purchase agreement pursuant to which the converted goods were acquired.

The Florgale Group conducted a family business of manufacturing and selling uniforms, business wear, sporting and health care apparel, and hospital linen. Originally it produced coats, but began to manufacture uniforms during World War II. The business then moved into hospital lines and apparel. Several years before the appointment of the receiver, the Florgale Group began to manufacture corporate uniforms, but it achieved only a "negligible" share of that market. It was not a retail business. It sold to large corporations directly, and also sold to a network of retailers. It had agents and distributors outside Victoria. Its customers included a number of hospitals.

The business operated in three related segments:

The purchase of corporate apparel entailed a taxation advantage to the purchaser, provided that the garments were capable of 3-5 years wear. The Florgale Group corporate garments were relatively long-lasting and did not become obsolete as quickly as ordinary fashion garments. It was not disputed that the corporate uniform stock had a narrower "niche" market than ordinary fashion garments.

On or about 30 January 1989, the Bank of New Zealand ("BNZ") granted financial accommodation to the Florgale Group, secured by the following:

(a) A debenture charge over the assets of, and an undertaking by, Florgale Uniforms.

(b) A debenture charge over the assets of, and an undertaking by, Florgale Uniforms NSW.

(c) A debenture charge over the assets of, and an undertaking by, Professional Uniforms.

(d) A debenture charge over the assets of, and an undertaking by, Group Textile.

(e) A debenture charge over the assets of, and an undertaking by, Thurston.

(f) A mortgage by Group Textile of the Union Street Property.

(g) A mortgage by Thurston of the Little Gold Street Property.

On or about 30 January 1989, each of the above companies and Australian Outback Travel Company Pty Ltd ("Australian Outback") (a travel business conducted by John Burnes' son) executed a cross-guarantee in favour of BNZ.

In January 1989, John Burnes, Colette Burnes, David Burnes and Constance Mary Ryan (now deceased) each executed a personal guarantee dated 30 January 1989, in favour of BNZ in respect of the Florgale Group facility.

On 7 August 1992, Group Textile executed a deed of undertaking in favour of BNZ.

On 17 August 1992, Elizabeth Burnes executed a guarantee and indemnity in favour of BNZ.

On 4 September 1992, the Florgale Group, Thurston and Group Textile executed a deed of subordination in favour of BNZ.

In February 1994, BNZ released Australian Outback from its obligations under the cross-guarantee dated 30 January 1989.

In July 1997, the NAB succeeded BNZ as lender and holder of the above guarantees and securities. It is not disputed that the NAB thereby acquired the benefit of all the guarantees and securities, the validity of which was not challenged.

By 1998, the Florgale Group was experiencing financial difficulties and liquidity problems. Its liability to the NAB was approximately $1 million. The market for health industry apparel had reduced, because hospitals no longer bought uniforms for staff, but left the purchasing to them. Similarly, the market for corporate uniforms had diminished, as corporations no longer purchased uniforms directly to provide cost-free to their staff, but left it to staff to purchase. John Burnes' son made an unsecured loan to the business of $250,000. In early 1998, John Burnes informed the Florgale Group staff that sales targets had to be met within the next few months or the business would be wound up or sold, as the Burnes family was not willing to continue to commit further funds.

In March/April 1998, the Florgale Group's funding arrangements with the NAB were due for review. The NAB was concerned about the continued provision of banking facilities to the Florgale Group. It instructed Mr Orders of Bird Cameron to investigate and report upon the Florgale Group.

In the course of discussions in March/April 1998, John Burnes provided Orders with information concerning the Florgale Group. Orders completed his review and prepared a report dated 9 June 1998 to the NAB ("the Quick Evaluation Report").

The main findings of the Quick Evaluation Report were as follows:

(a) The Florgale Group had incurred losses in the five financial years ending 30 June 1997, although there was a possibility of a small profit before income tax being made in the current year (ending 30 June 1998). The poor trading results were due to a trend of declining revenues from $10.7 million in the 1992/93 financial year to approximately $5.7 million in the 1997/1998 financial year;

(b) The Florgale Group did not prepare a business plan, and did not have a basic marketing plan;

(c) there was insufficient management control over growth in revenue of the Florgale Group;

(d) the trading losses and decline in sales revenue were due to the decline in the public health market, with hospitals no longer purchasing uniforms, but leaving it to their staff. The corporate uniform market, in which the Florgale Group had attempted to sell product over the past two years, was highly competitive. The Florgale Group had negligible market sales and had lost significant sales due to changes in corporate policy at Coles and Kmart. The corporate uniform market was also becoming more fashion-oriented;

(e) a number of creditors were refusing to supply goods to the Florgale Group until their accounts were brought within acceptable trading terms;

(f) the accounting systems were inadequate to provide standard profit and loss statements for each of the Florgale Group's divisions;

(g) there were no adequate strategies being implemented to increase sales;

(h) the NAB should not increase the level of its financial accommodation to the Florgale Group companies;

(i) the NAB should give notice to the Florgale Group companies to re-finance their debts;

(j) if the Florgale Group companies failed to refinance and the losses continued, a receiver and manager should be appointed to them;

(k) the Florgale Group had only been in the corporate uniform market for one to two years and was still attempting to develop a competitive advantage. The report stated: `Mr Burnes advised that Professional Uniforms Pty Ltd's market share is negligible. Mr Burnes advised that this market is becoming more fashion-oriented and more varied in the number and type of uniforms an employee may have';

(l) Mr Burnes estimated that the Florgale Group had a market share in health uniforms of 10% to 15% in Victoria and a market share of 15% to 20% in Victoria for linen. The market share for continence care products was 20% to 25%. (The report did not specify whether that market was confined to Victoria or not.) Sporting apparel was sold to the VAFA, the VCFL and a part of the New South Wales Football League;

(m) Mr Burnes was unable to advise of the key success factors for the corporate uniform division, because the Florgale Group was still attempting to develop a competitive advantage. Those factors should have been identified prior to entering the market;

(n) The Florgale Group had incurred significant losses in the past and trading results had been adversely affected by:

a declining market in health;

the declining overall market;

a declining market in corporate uniforms.

(o) Linen was not purchased in December and January, due to the holiday period. The sales of blouses and skirts declined in December and January, due to the holiday period;

(p) the lead-time to purchase linen was approximately three months. The Florgale Group held stock equivalent to approximately five to six months' sales in raw material and the area appeared to be overstocked;

(q) The corporate uniform stock represented approximately 5.58 months' of stock, and excessive stock levels appeared to be held.

At a meeting on 24 June 1998 attended by John Burnes, David Burnes, Orders, NAB officers and others, the NAB officers informed the Messrs Burnes that the Florgale Group's loan facility would not be renewed unless it retained an outside marketing consultant.

At the meeting, Orders recommended the appointment of Business Concepts Pty Ltd ("Business Concepts") as a suitable external marketing consultant. In his witness statement, John Burnes stated that Orders revealed after the meeting that he had an involvement in Business Concepts. John Burnes subsequently obtained quotations from Business Concepts and another marketing consultancy, on the advice of Mr Grey of Pitcher Partners. The Florgale Group ultimately retained Business Concepts. In cross-examination, John Burnes conceded that Orders did not say that he had any financial involvement with Business Concepts.

Although there appeared to be a suggestion that Orders' recommendation of Business Concepts was in some way improper, no impropriety was expressly alleged or established. There is no evidence to suggest that either Mr Orders or his firm, Bird Cameron, had any financial interest in the organisation, or would benefit in any way from its retainer. The Florgale Group chose to retain Business Concepts after having investigated alternatives and calling for quotations.

The plaintiffs contended that the Quick Evaluation Report exaggerated the rate of the Florgale Group's financial deterioration by inaccurately stating that revenues were declining. By a letter of 21 September 1998 to the NAB, John Burnes criticised the Quick Evaluation Report's reference to the sales of $10.7 million in 1992/3, which included $4 million worth of sales by Australian Outback, and "the 1992/3 revenue was $6,712K not $10,743K and the Nett loss $215K was abnormally affected by abnormal expenditure to close the Albury factory". The plaintiffs argued, however, that the Quick Evaluation Report establishes Orders' familiarity with the Florgale Group's business operations and the nature of the `special purpose stock', which should be taken into account when determining his liability.

At trial, Orders defended the reference to a trend of declining revenues in the context of a business which "was sitting on 12 months' worth of stock". He contended that the Florgale Group needed a substantial increase in revenue if it were to avoid insolvency.

Orders explained that he recommended in the Quick Evaluation Report that the Florgale Group be required to re-finance notwithstanding a debt of $1 million and net tangible assets valued at $3 million in the companies' books, because "It's a question of weighing up the risk profile of the business. This company was carrying an equivalent to about 12 months sales in stock at any point in time and it wasn't running that stock down. It needed to increase sales to run stock down. The risk is whether this company was capable of doing it ... ".

Mr John Burnes appeared evasive and inconsistent when cross-examined on matters included in the Quick Evaluation Report and the state of the Florgale Group business prior to the appointment of Pitcher Partners. He conceded that he had provided information to Orders for the preparation of the report. He agreed that the sales to hospitals were decreasing, but denied that the public health market of the Florgale Group was decreasing. At one point, he asserted that the decline in direct sales to hospitals was compensated for by sales to hospital staff. Ultimately, however, he conceded that the staff purchased less than the hospitals had previously purchased.

He agreed that the Quick Evaluation Report correctly stated that the Florgale Group had only a negligible share of the corporate uniform market and had lost sales because Coles no longer purchased uniforms for its staff.

Mr Burnes agreed that the Florgale Group faced the fundamental problem that its stock level of made-up garments was increasing year by year and that corporate uniforms were becoming more fashion-oriented. He conceded that the Florgale Group could not achieve any reduction in stock, which was absorbing more company money.

Mr Burnes was unresponsive to cross-examination on whether the Florgale Group companies were insolvent at the time of the appointment of the voluntary administrator. He did not answer the question and repeatedly stated that "in my view we needed to restructure".

At trial, Mr Burnes testified that he believed that the entire Florgale Group stock could have been sold within six weeks to existing customers at various discounts which would have produced total sales receipts of approximately $879,000, a sum sufficient to enable the Florgale Group to satisfy the liabilities to the NAB from its assets.

He conceded that the Florgale Group had not attempted to conduct a large sale of of stock at a discount in response to the financial difficulties experienced in the period leading up to the appointment of the voluntary administrator.

When questioned whether sales in the 10 months ending 10 April 1998 were $572,380 less than for the corresponding period, as stated in the Quick Evaluation Report, Mr Burnes stated that he did not know whether it was right or wrong, could not say whether the figure was "in the ball park", had never reviewed the Quick Evaluation Report and only "signed off" on his letter to the NAB dated 21 September 1998, which was drafted by the Florgale Group financial controller, Terry Maher.

At trial, Mr Burnes stated that he did not know what the Florgale Group sales figures for the relevant period were. He denied that there was widespread knowledge in the industry that the Florgale Group was experiencing financial difficulties. He denied any knowledge of the companies referred to in the Quick Evaluation Report which had stopped supply on credit. However, he disagreed that the Florgale Group stock levels were too high.

Mr John Burnes' evidence was inconsistent, confusing and unconvincing. It frequently conflicted with the statements included in, or the tenor of, the documentary evidence. Mr Burnes was uncooperative, unresponsive and defensive in cross-examination. He was not, in my opinion, a reliable or frank witness.

By August/September 1998, the Florgale Group was continuing to experience considerable financial difficulty and it was not meeting its sales budgets. It therefore retained Pitcher Partners to develop a strategy to address its problems. Mr Stewart of Pitcher Partners and John Burnes discussed three options available to the Florgale Group. Those options were: (a) to find an equity partner; (b) to sell two divisions of the business; or (c) to sell all five divisions.

In or about October 1998, Pitcher Partners prepared an Information Memorandum on the Florgale Group. The Information Memorandum proposed a purchase price of $1.5 million for four of the five divisions of the Florgale Group business. (At that stage, David Burnes had an interest in acquiring for himself either the sporting or apparel division of the business.) According to John Burnes, Mr Robert Peake of Pitcher Partners privately advised him that a figure of $800,000 - $1 million for four divisions (excluding the sporting or apparel division) was a realistic figure.

Pitcher Partners approached the Florgale Group's competitors and others, in order to assess the interest in the proposed sale. Mr Waters of Bizwear, a competitor, by letter to Pitcher Partners dated 21 October 1998 expressed interest in purchasing some assets of the Florgale Group, but stated that he considered the value was substantially less than the $1.5 million indicated in the Information Memorandum. The letter also expressed concerns about some of the information provided in the Information Memorandum.

By an e-mail dated 23 October 1998 to Pitcher Partners, Mr Waters stated that he valued the Florgale Group's current supply contracts, client list, uniforms, garments, raw material, stock and sundry plant and equipment at approximately $200,000. The e-mail noted that Mr Waters considered the supply contracts to be virtually worthless, the logoed stock to be worthless (as the existing contracts did not bind the clients), and the "stock service stock" to be fairly dated and in poor condition.

Pitcher Partners received further expressions of interest, but did not succeed in their attempts to sell the business (or any part thereof) of the Florgale Group as a going concern. Mr John Burnes was dissatisfied with Pitcher Partners' efforts to sell the business.

By late October 1998, the sales staff of the Florgale Group had not met the agreed sales budget, so the gross profit was not sufficient to meet budgeted expenses. Concerned about liability for insolvent trading, on 29 October 1998 the Florgale Group's directors resolved to appoint David Scott of Scott Partners as the voluntary administrator of each of the companies in the Florgale Group.

The voluntary receiver reduced the staff from about 34 persons to 17 staff. At trial, Mr Burnes stated that he could not give the exact number of despatch staff left after the reduction, but estimated three or four persons. Mr Burnes professed not to know what "a significant reduction" of staff would be. Ultimately, he conceded that there was only one despatch staff member left. Although he denied that a single despatch staff member would be incapable of handling the entire contents of the warehouse (for the purposes of a total closing-down sale) he conceded that six staff members in receiving and despatch had handled the normal volume of sales. There were also normally two people in the area of order entry and customer service.

The voluntary administrator also attempted to sell the Florgale Group business. On 31 October 1998, Mr Scott offered the Florgale Group's business for sale as a going concern. Shortly after, he prepared an Information Memorandum and advertised the business in "The Age" newspaper. There were a number of expressions of interest in response. The voluntary administrator received a number of inquiries from potential purchasers who signed confidentiality undertakings, but no sale was effected.

The voluntary administrator also retained Taylor Lockwood, a firm of auctioneers and valuers, to conduct a valuation of the Florgale Group's plant and equipment. Taylor Lockwood staff inspected the plant and equipment and, by letter dated 29 October 1998, ascribed an auction realisation value of $65,050 to it.

The directors of the Florgale Group did not notify the NAB of their intention to appoint a receiver. The voluntary administrator notified the NAB. An internal NAB Memorandum by Guy Edwards dated 30 October 1998 noted the appointment of a voluntary administrator to the Florgale Group. It stated that the NAB was unaware of any justification for the voluntary administration process. It estimated that, based on Orders' previous investigating accountants' report, stock (which had a book value estimated at about $1.9 million) was likely to realise $500,000 if sold as a going concern, and $303,000 on a "close down" basis.

By letters dated 2 November 1998, the NAB served formal demands on the Florgale Group companies, Group Textile and Thurston, demanding payment of $1,035,346.74, together with interest and bank charges.

On 5 November 1998, the NAB appointed Mr Orders as receiver and manager of the property charged by the debentures. The plaintiffs did not challenge his appointment.

Following his appointment as receiver, Orders, accompanied by two senior members of his staff (Norman Jones and David Quin), arrived at the Florgale Group's business premises in Brunswick at about 4.00pm on 5 November 1998.

The receiver and his staff met Mr John Burnes. They served the receivership documents on him. A meeting then occurred, attended by Messrs Orders, Jones and Quin, the Messrs Burnes and Florgale's financial controller, Terry Maher. The directors were handed a document which Orders routinely provided to company officers at the commencement of a receivership, entitled "Acknowledgment

of Responsibilities by Officers of the Company in Receivership" ("the Acknowledgment").

"1. Without the express written authority of the Receiver or a person authorised by the Receiver:

(b) No goods will be accepted by the company from any source whatsoever unless they are the subject of a signed order by the Receiver.

Messrs John and David Burnes signed the Acknowledgment. John Burnes testified that he understood it to prohibit him from making any contact with customers or from making any sales without first obtaining the receiver's written authority.

There is a conflict of evidence on what was said at the initial meeting on 5 November 1998. The Messrs Burnes contended that Orders expressly prohibited them from making any sales without his prior written approval. In his witness statement, John Burnes stated that at the meeting on 5 November 1998, Orders said that he was now in "complete and total control" of the company and that he instructed John Burnes to "have no further contact with clients regarding any matters unless instructed to do so". John Burnes stated that he informed Orders of discussions he had had with various parties regarding the sale of all or parts of the business. Orders said that "he or his staff would continue the sales negotiated for the business" and that the directors were not to be involved "in any way". At trial, John Burnes testified that Orders instructed him not to approach customers without written consent and "to sit in my office and do what he told me".

David Burnes also asserted that Orders informed those present at the meeting that he was in complete control and that all matters in future were to be referred to him or to his staff. Terry Maher gave evidence that Orders indicated that he would be in complete control of the company from that point on.

Orders testified that at the meeting on 5 November 1998, he advised that the assets of the Florgale Group companies would be under his control and that John Burnes stated that the companies were operating on a "skeleton staff" and had insufficient assets to repay the bank.

Orders denied that he prohibited the Florgale Group directors and staff from contacting clients, to seek orders and conclude standard sales transactions without obtaining his prior authority. He conceded that he instructed John Burnes at some point (which may have been the meeting on 5 November 1998) not to contact "contracted clients" due to the risk of not being able to guarantee supply and losing such customers while trying to sell the business as a going concern.

Orders testified that he emphasised that the companies would continue to trade and that staff should seek orders and contact customers. He did not prohibit any staff member from contacting customers of the business "because I was there to sell stock". He expected the Messrs Burnes to "contact clients that they deal with" to obtain orders.

David Quin, who was present at the meeting, could not recall Orders prohibiting John Burnes from contacting customers without prior consent and testified that such a comment was unlikely. Mr Quin prepared a contemporaneous file note of the meeting dated 5 November 1998, which states, inter alia:

"MJO explained all assets under his control. Directors' powers ceased as they did when Administrator appointed. J Burnes said trying to pay bank but doesn't believe there are sufficient assets in the company. Advised trust owns three properties which will have to be sold. Pitcher Partners provided brief valuing of business at $1.5 million with realistic value of $1 million excluding debtors." J.B. advised that he has been trying to sell business with Administrator. The company employs a skeleton staff only at present and is making some profit on orders. He mentioned Coles contract - advised contract not affected by appointment of Administrator or R&M."

Norman Jones, another member of Mr Orders' staff, was also present at the meeting on 5 November 1998 and prepared a file note. Norman Jones' handwritten file note states, inter alia:

"J.B. trying to pay out bank Not enough value company to pay out bank Trust properties to be sold - sell in an orderly way Went to Pitcher Partners - Equity Role - whole sale Administration ...going concern ... ...$1.5m - should get $1.0m including stock. Bizwear expressed cost plus $600,000. On Friday... all wanted to offer was $200,000 Skeleton staff @ moment..."

John Burnes initially denied that he told Orders that the Florgale Group was operating on a skeleton staff. Ultimately, he was unsure whether he had said "small" or "skeleton".

Immediately after the receiver's meeting with the Messrs Burnes and Terry Maher on 5 November 1998, the receiver and his staff addressed a staff meeting.

Norman Jones' file note of the staff meeting held at 4.35pm on 5 November 1998 states, inter alia:

"All assets... under control of R & M MJO legal liable for all debts MJO indicated personal liable ... Outlines trading position Security position - Priority creditors ... How long are we going to trade on Outstanding orders to be reviewed. DAVID Cash-flow position ... Creditors queries ...to be put to D.Q. No guaranties as to ... but continue until further notice With orders - need to ensure stock position..."

Orders testified that he also addressed the staff as a separate group on 5 November 1998, or on the following day. He stated that he told the staff that the Florgale Group companies were continuing to trade and that they should continue to take orders for the business. Although he could not recall who was present, Mr Orders asserted that he encouraged staff to seek orders and did not restrict or prohibit them because "it defies logic to trade a business on and not seek sales".

At trial, Mr John Burnes initially testified to a "total recollection" and "perfect" recall "like it's cast in iron" of the meeting on 5 November 1998. Subsequently, in the course of cross-examination, he admitted to uncertainty, lack of recall or weak recall. John Burnes' account of what was said at the meeting is inconsistent with the contemporaneous diary notes of Messrs Quin and Jones. As discussed in detail below, Messrs Orders and Quin presented as credible and consistent witnesses, whose account of events is, in many instances, supported by, or consistent with, the contemporaneous documents. In the case of conflict, I prefer their evidence to that of Mr John Burnes and Mr David Burnes. I am satisfied that the file notes of Messrs Quin and Jones accurately reflect the principal substance of what was said at the relevant meetings. Further, I do not consider that the Acknowledgment document which Mr Orders routinely distributed would reasonably be interpreted by experienced business people as a blanket prohibition on contacting any customers in order to secure an order or to make any sale without first obtaining consent.

On 5 November 1998, David Scott forwarded the Information Memorandum prepared by the voluntary administrator, together with a list of potential buyer contacts for the business, to Orders' firm.

Having assumed control as receiver and manager, Orders arranged for circulars to be sent to creditors and correspondence to be sent to the Deputy Commissioner of Taxation. Mr Quin, a chartered accountant and registered liquidator, was mainly based at the Florgale Group's premises in Brunswick.

Under Mr Orders' supervision and instructions, his staff operated the business, contacted customers and suppliers, investigated the Florgale Group's financial position and compiled a new information memorandum to be sent to potential purchasers of the Florgale Group's business, assets, or parts thereof.

On 10 November 1998, Orders sent confidentiality undertakings to 24 persons who had expressed an interest in purchasing the Florgale Group's business or its assets.

Quin familiarised himself with the Florgale's Group's operations, finalised a stock-take commenced by the voluntary administrator and considered retention of title claims, employee entitlements, and the collectability of debts. He also dealt with customers' claims and queries.

In his witness statement, John Burnes stated that in the week commencing on 9 November 1998, he approached Quin and suggested contacting customers and offering them their particular style and colours at a range of discounts, in order to achieve the maximum return for stock. He had prepared a summary sheet listing clients during the voluntary administrator with "various discount points that such stock could be sold at". Burnes stated that Quin responded that it was none of Burnes' business and that he (Quin) would make the necessary sales arrangements as he saw fit.

Quin denied that such a conversation ever occurred. He stated "I would never say to a director of a company that it was none of his business. Nor would I say that I would be making all the arrangements". Quin stated that if Burnes had made suggestions about the sale of stock, he would probably have discussed it with the receiver and sought his advice, because "I know that the receiver and manager likes to consider input from the directors. He would have been interested in hearing any suggestions in relation to the sale of stock." There is no apparent reason why Quin would respond to a director in the manner alleged by Mr Burnes. There was no contemporaneous complaint. It is inconsistent with Quin's regular and documented consultation of the directors for approval on sales at a discount and Orders' documented consultation of them on other matters, discussed below. Further, I considered Mr Quin to be a credible and consistent witness. I accept his testimony.

On 9 November 1998, Quin retained Taylor Lockwood to value the Florgale Group stock. Taylor Lockwood personnel visited the Florgale Group's premises. They valued the stock on the basis of percentages of cost price to produce market value, existing use, and auction realisation value. Taylor Lockwood confirmed the valuation by letter to Bird Cameron dated 20 November 1998.

Mr Quin testified that Taylor Lockwood staff gave him the percentages orally and he then prepared a valuation of stock by using the Florgale Group Inventory Analysis of stock as at 31 October 1998. He calculated the cost price by deducting 30% from the selling price and then applied the percentage of discount estimated by Taylor Lockwood to produce the estimated auction realisation value. Quin's calculations produced a figure of $345,242 for the estimated auction realisation value stock as at 31 October 1998. In making the calculations, Quin did not make any further discounts to take account of old or soiled stock.

Quin contacted the Florgale Group's Sydney employees, Helen Pearson, and De-anne Hespe and liaised with Erica Kirchner, its agent in Tasmania.

He calculated the Florgale Group's superannuation liability and cash position, obtained a mailing list, opened necessary accounts and arranged for necessary services.

By letter dated 10 November 1998 to Norman Jones of Bird Cameron, John Burnes expressed concern about a number of specified clients of the Florgale Group. The letter noted that the directors had sought to sell the business as a going concern or to find a new equity partner through Pitcher Partners, and had appointed the voluntary administrator when concerned about Pitcher Partner's lack of progress.

The letter further stated "As each day passes our competitors become more aware of our position and rather than purchase our Business can look to pick up the pieces at no cost. Our "specialist stock" greatly reduces in value if this occurs. The longer we delay in advising the customers I have listed the greater the danger that they will be approached by our competitors and the chance will be lost to sell that section of our sales and also the unique stock that we hold for them".

The letter noted that the voluntary administrator had instructed the Florgale Group to reduce the number of staff to the absolute minimum to permit the business to continue and be sold as a going concern. It stated "We have three only staff for Despatch Order Entry/Customer Service. These areas were previously handled by nine staff. If one leaves again we have a major problem".

By a letter to Norman Jones dated 11 November 1998, John Burnes advised that he had received a copy of a facsimile sent by Coles to all Coles supermarkets, advising the staff to cease buying from the Florgale Group until further notice. The letter stated "Coles garments are uniquely designed and I am therefore concerned that this action will greatly reduce the value if any of our stock for this client".

Orders prepared a report dated 11 November 1998 addressed to Guy Edwards of the NAB. The report gave an auction realisation value of $337,620 for stock, which was derived from Quin's calculations based on the Taylor Lockwood valuation of 9 November 1998, partly on a stock count, and partly on the companies' stock records.

The report referred to a number of retention of title claims. It also referred to a budget to 30 November 1998, with forecast sales of $137,000, a cost to sell of $100,000 and operating expenses of $80,000, resulting in a budgeted net loss of $43,000 for the period from 11 November 1998 to 30 November 1998.

"Given the size of the expected loss in the budget period a decision has to be made on whether to continue to trade. The advantages of continuing to trade are that a buyer may be found who will pay an amount for goodwill for the group's various supply contracts. Further, there may be a saving as to termination payments. However, if I was to continue to operate the business, the losses have to be funded. Any losses incurred will erode the bank's security. Further, based on the information contained in my investigating accountants report, the bank is likely to suffer a shortfall in relation to the properties owned by the group..."

The report noted that no purchasers of the business had been forthcoming, despite the successive attempts of Pitcher Partners and Scott Partners to market it. It continued:

"Given the above, I recommend that the operations of the group should cease. As work in progress is likely to have no value, I consider that an assessment be made and any profitable work in progress completed. Sufficient staff would continue to be employed for this purpose." ... Stock on hand will be offered to customers at the best obtainable price provided this price is above the auction realisation price. All unsold stock and plant and equipment will be sold by auction_"._ (Emphasis added).

On 11 November 1998, Orders discussed his report at a meeting with Messrs Isherwood and Edwards of the NAB.

Orders' file note of the meeting dated 11 November 1998 noted:

"Closure of business. MO - Reviewed report with RI and GE - Reviewed budget with RI and GE - MO also gave a list of parties who had inquired re sale of business with both Administrator and R&M - Discussed trading loss versus Advantages of sale - RI - advised closed the business."

At trial, Mr Orders testified that at the meeting with Messrs Edwards and Isherwood, he reiterated his written recommendation that stock should be offered to customers at the best possible price in excess of auction value, and that the NAB officers agreed with the recommendation. They also agreed with the recommendation that the directors should be asked to fund closing losses if the business should close.

A handwritten notation on the report notes, inter alia:

"Based on report and discussions - complete confirmed orders - discuss support guarantors to provide funding to trade; or - close business - sell stock by approaching trade (Emphasis added). - investigate reduction in debtors ledger - increase provision to $550,000"

The handwritten note is that of Guy Edwards of the NAB. At trial, Mr Edwards gave evidence, which I accept, that his notation reflects the discussion which occurred at the meeting. Although his independent recollection of events was slight, Mr Edwards denied that his note represented instructions which either he or Rex Isherwood gave to Mr Orders. He denied that the NAB decided on what course the receiver would adopt, but agreed that the NAB concurred in Orders' recommendation that the trade, including customers, should be approached, in order to explore whether a better price for the special purpose stock could be obtained in that way than at auction.

Mr Edwards, who was himself an experienced receiver, considered that it would be beneficial to approach the customer base before deciding on an auction when disposing of stock after a decision had been made to close the business. However, he did not agree that it was a standard practice.

I am satisfied that Orders, as reflected by his report to the NAB dated 12 November 1998, recommended that trade, including customers, should be approached and that the business should be closed, unless the directors were prepared to fund the losses involved in continuing to run it. I am also satisfied that the NAB officers expressed their agreement or concurrence with that advice, although they did not make the decision or instruct Mr Orders in the course he should take.

Following the meeting of Orders and the NAB officers on 12 November 1998, there was a meeting at the Florgale premises attended by Messrs Orders, Jones, Quin, the Messrs Burnes, and Mr Terry Maher.

There is a conflict of evidence on what was said at the meeting.

Orders testified that at the meeting, he presented a budget disclosing a projected loss for the business from 11 November 1998 to 30 November 1998 of $42,000. He went through the items of revenue and expenses that made up the budget and pointed out a contingency of $10,000.

In his witness statement, Orders stated that:

"John Burnes told me that my projection of trading losses to 30 November 1998 of $42,000 might be conservative because customers could not be guaranteed supply. Because of the nature of my appointment I was not in a position where I could guarantee customers, staff or suppliers of the Florgale Companies that the Companies would continue to operate".

He testified that he discussed the different options of: (a) continuing to trade while funding ongoing losses; (b) selling the business; and (c) closure of the business.

In his witness statement, Orders stated that:

"I asked John Burnes whether he or his family would be able to fund any trading losses and allow the businesses to continue trading whilst looking for a purchaser. John Burnes told me that his family had no money and that it had injected $3 million into the business of the Florgale Companies in the past two years including $250,000 which was injected in February 1998".

In his witness statement, Quin stated that the issues discussed at the meeting of 12 November 1998 included, inter alia:

a. the budget for trading by the Florgale companies to 30 November 1998 ...

b. the possibility of continuing to trade in order to maximise the amount that could be realised for the Florgale companies or their assets...

g. Malcolm Orders said that if there were no firm offers received by 13 November 1998, the operations of the business would have to be stopped. John Burnes agreed with Malcolm Orders' statement that because of the risks of incurring further losses, he could not continue to trade on the `never `never".

At trial, Mr Quin testified that a cash flow statement was produced at the meeting on 12 November 1998. He denied that Orders asked the directors to contribute $20,000 to $30,000, in order to continue trading.

Quin's file note of the meeting on 12 November 1998 records that a budget showing a loss of $42,000 was discussed. It states, inter alia:

"MJO commented that JB was saying losses could be worse than budget because of losses on other sales. JB agreed. He said there may be a problem with forecast sales. JB said sales could be lost because no guarantee of continuity of supply. MJO said he agreed and continuity of supply became a problem when Administrator appointed. . . . MJO explained options - continue to trade and incur loss - cease to trade - try to sell business ... JB said we have to consider whether losses can be covered by a higher price for assets from selling as a going concern. J.B. explained Coles knew of situation through a competitor. ... JB: what are you going to do with customers MJO: said we can ring them but we can't guarantee supply."

The file note of Norman Jones of the meeting on 12 November 1998 records that Orders noted that continuity of supply was a problem. It also indicates that Orders stated that there were trading losses and that he could not trade on the "never never", with which John Burnes agreed. The file note further records that Orders stated that if he could not secure potential buyers for the business, he would first finish the profitable work in progress, and close the business.

Norman Jones' file note also records the following:

"... "JB: Clients won't call back - ... " "MJO: We will contact them but to be taken with full knowledge of continuity - seek orders".

The Coles contract was discussed at the meeting. Orders testified that John Burnes referred to his concerns about the directive to Coles' staff to seek an alternative supplier, and that John Burnes said that the estimates of losses were conservative, due to the loss of the Coles contract and the inability to guarantee supply to customers. John Burnes testified that he had asserted that `Coles had died' and that Orders was to blame.

John Burnes testified that he urged Orders to contact customers. He conceded that Orders may have said that the customers would be called, but that continuity of supply could not be guaranteed.

Orders denied that at the meeting on 12 November 1998 John Burnes made proposals to contact customers, to which Orders responded negatively. Rather, he contended that customers were already being contacted, and that he urged the Messrs Burnes to continue to do so, as even if trading ceased, it would still be necessary to sell stock in order to raise revenue.

In his witness statement, John Burnes stated that Orders:

"...advised that [the cash flow statement] showed the business running at a $20,000 - $30,000 loss per month if it continued to trade for the month of November".

"Orders called on the directors to contribute $20,000.00 or $30,000.00 personally if we wished him to continue trading and we said we were not prepared meet this request".

In his witness statement, David Burnes stated:

"At the meeting on 12 November 19998 [sic] Malcolm Orders showed me a cash flow statement which he said Norman Jones had prepared. The statement showed the business running at a $20,000.00-$30,000.00 loss per months if it continued to trade for the month of November. Orders called on me and John to contribute $20,000.00-$30,000.00 personally which I indicated I was not prepared to do".

Mr John Burnes agreed that the document "Profit and Loss Combined", prepared by Bird Cameron Partners and the budget for the period 5 November 1998 to the end of November 1998 were discussed at the meeting on 12 November 1998. He stated that he saw the document for the first time on the day of the meeting. He was told it was a cash flow prepared by Norman Jones. He testified that he could not see or understand the detail of the document. He asserted that the Profit and Loss document tendered in evidence was not the same as the document he was given at the meeting.

At trial, John Burnes conceded that at the meeting, Norman Jones' estimate for loss until the end of November 1998 at the meeting was not $20,000 to $30,000, as he had stated in his witness statement. He agreed that the meeting commenced with Orders explaining that there would be an estimated $42,000 loss to 30 November 1998, and that the figure was arrived at by looking at the sales and the cost of goods and expenses, while making an allowance of a $10,000 general contingency for other matters not contained in the budget calculations. He asserted, however, that various estimates of the potential loss were made at the meeting, and that he (John Burnes) spoke of a loss between $20,000 to $30,000.

At trial, John Burnes conceded that he believed that the continued trading of the Florgale Group to the end of November 1998 would result in a loss between $37,000 and $42,000. However, he denied that his comments in relation to the probable losses for the rest of November were based on his independent view, contending that they were based on the figures provided to him by Norman Jones and Mr Orders. He denied having had input into the budget, asserting that it was prepared by Terry Maher and Norman Jones.

In cross-examination, Mr David Burnes conceded that he did not see the cash flow statement spreadsheet at the meeting, as he had stated in his witness statement. He asserted that Orders informed him that there would be a loss in the vicinity of $20,000 to $30,000 and asked him what he was prepared to do about it.

Terry Maher, the financial controller of the Florgale Group, together with Norman Jones, assisted in the preparation of the figures for the Florgale Group. Mr Maher was not an impressive witness. At trial, his recollection of the meeting on 12 November 1998 was very poor. He could not recall whether several draft cash flow documents were prepared leading up to the meeting on 12 November 1998. He could not recall whether the final version of the document showed a loss or a profit. He could not recall whether there was discussion about a cash flow document or a $10,000 contingency at the meeting on 12 November 1998. He did not recognise the cash flow document in cross-examination. Ultimately, Mr Maher conceded that he could not recall anything that was said or done at the meeting on 12 November 1998.

Following the main meeting on 12 November 1998, Malcolm Orders and John Burnes had a private conversation.

Orders' file note of the conversation records the following:

MO: "You said today that you were not allowed to contact clients. That's not true. You have never been advised not to seek orders"

At trial, Mr Burnes conceded that he and Malcolm Orders had the above discussion.

"I need to know are you or your family in a position to fund trading losses. This would effect the decision to close. John Burnes responded: We have no money left. We put in $3 million in the last 2 years and put in the last $250k in February. The simple answer is NO."

Orders testified that he balanced the advantages and disadvantages of continuing to trade. His file note dated 12 November 1998 and 11 November 1998 states:

"File Note Re Closure - Advantages of Trade On/Sale May realise a value for assets [greater than] auction May avoid having to pay termination payments May achieve value for goodwill if contracts assigned: Coles Supermarket; Baptist Community Service; Mornington Peninsula Royal District Nursing; St Vincents Sydney; Baptist Community Centre. Disadvantages May not find a buyer for business - High Risk Trading losses of $42,899 if business not sold in 40 days Trading losses don't include allowance for additional R&M fees - could be additional cost of $20k plus above that if business closed. [therefore]Trading losses of trade could be $62,899+. Directors engaged Pitcher Partners to find a buyer prior to appointing Administrator and were unsuccessful in identifying a buyer. Shortfall to secured creditor - if not sold shortfall increases, secured creditor taking the risk and advised does not wish to trade on No certainty a buyer will be identified which will produce returns > closure Based on above a decision to cease operation unless directors are prepared to fund the losses."

At the meeting on 12 November 1998, Orders informed John Burnes that his staff had made attempts to sell the business with little success to date, and gave him a list of potential purchasers which had been approached, telling him that he was free to contact any of them himself, as well as others not on the list. Orders stated that if a firm offer could not be obtained by 5.00 p.m. on 13 November 1998, he would close the business down by 16 November 1998.

On the afternoon of 12 November 1998, John Burnes contacted several prospective purchasers, including the managing director of Yakka, Mr Andrew Edgar, who attended the Florgale Group premises that same afternoon for an inspection. Both David Quin and John Burnes were present. Edgar indicated that he was interested in parts of the business, but required an information brochure.

Although Orders had indicated that an Information Memorandum would be available by close of business on 12 November 2004, it was not, in fact, provided until Tuesday 16 November 1998.

At trial, Mr Orders conceded that he did not consider that there was a realistic prospect of securing a firm offer to purchase the business by 5.00 p.m. the following day but sought to pressure the directors to contact the most likely prospective purchasers.

By a letter to Guy Edwards of the NAB dated 12 November 1998, John Burnes, expressed grave concern "at the current position in regard to the appropriate realisation of Business and Assets of the Florgale Professional Group which in my estimate is reducing rapidly on a daily basis since the appointment of Mr Malcolm Orders...".

The letter stated that Burnes had been instructed to make no further contact with any clients "to seek to reassure them concerning continuity of supply". It further stated, "In the meantime of course our opposition has been approaching our client base with the story that our companies are in Receivership, and they must seek alternative supplies from them... The position again deteriorated on the 11th November with a circular sent to all Coles staff requesting that they cease buying from our company - see copy enclosed. Put simply our client base is being lost to our opposition due to a total lack of communication. As this occurs `specialist stock' reduces in value to next to nothing - to whom else but Coles staff can you sell a Coles Logoed blouse".

Edwards, by letter to Orders dated 12 November 1998, requested Orders to respond to John Burnes' complaints. The letter of Orders to Edwards of the NAB dated 16 November 1998 stated, inter alia,

"I confirm the instructions of my staff on Friday, 6 November 1998 that contact should not be made with contracted clients at that stage because of the uncertainty of the assessment of the trading position. I would reiterate that at that time I was not made aware by Mr Burnes of which clients were in fact contracted and further I was not informed of what representations were intended to be made to contracted clients. ... At all times Mr Burnes was under clear instructions to seek orders that were profitable and which could be completed in the short term and to this extent Mr Burnes was at liberty to contact clients. This is not disputed".

Despite his stated intention to close the business on 16 November 1998 if no firm offers were received, Orders in fact continued to trade until 25 November 1998. At trial, Quin stated that the business was not closed on 16 November 1998 because there were approximately 20 prospective purchasers who had expressed an interest. Further time was necessary for those persons to execute confidentiality undertakings and to conduct due diligence. Orders testified that the decision to trade on for a longer period was a commercial decision, rather than a response to John Burnes' complaints.

Orders could not recall when he informed the NAB that he had decided to extend the "trade-on" period. He agreed that he probably discussed John Burnes' complaints with Guy Edwards, albeit not immediately, and that he kept the NAB informed. Edwards could not recollect discussing Mr Burnes' complaints with Orders or participating in a decision to extend the trading period.

While Orders attempted to sell the business as a going concern, the Florgale Group continued to sell stock, including stock at a discount. The receiver referred proposed sales at a discount to John Burnes or David Burnes to seek confirmation that the offered discount price was reasonable. A leaflet was prepared advertising a clearance sale for bowls stock. Various invoices for sales at a discount were approved in writing by the Messrs Burnes. The plaintiffs assert that little stock was sold and there was no "pro-active" effort or strategy to sell it at a discount.

On 19 November 1998, Orders sent a Report as to Affairs to the directors.

During the week of 16 to 20 November 1998, Orders' staff continued to deal with prospective purchasers of the business. By 24 November 1998, no offers for the business had been received. Orders, concerned about the continuing losses, at 12 noon on 24 November 1998 met the Messrs Burnes. They discussed the various parties who had expressed an interest in buying the business. Orders said that it was clear that there were no genuine interested parties. John Burnes made a number of telephone calls to various parties. He expressed his conviction that an offer would still be received. Orders then met the Florgale Group staff. He explained that he would wait until 12 noon on 25 November 1998 for two prospective purchasers to get back to him, but if an offer were not received by that time, he would have no choice but to cease operating the Florgale Group business.

On 25 November 1998, Orders and Quin, having been advised that Bizwear was only interested in stock, and that Yakka would get back to him by 5.00 p.m., advised the Messrs Burnes that the employment of staff, including the Messrs Burnes, would be terminated that day.

On closing the business, Orders decided to auction the remaining stock.

He contacted Dennis Mathews of Taylor Lockwood to discuss the proposed auction. Mathews told him that the most appropriate date would be 8 or 15 December 1998. The latest date in 1998 for holding an auction was 15 December. As January was not a good time of year to hold an auction, the earliest realistic date in 1999 for an auction would be February.

Quin also testified that he spoke with Mathews. The file note of Mr Quin dated 25 November 1998 records "advertise this week 28/11 & next week 5/12. Hold auction 8/12/98. Good time to have auction B4 latest 15/12/98. Next available 2 week in Jan - not a good time - Next good time First week of February".

On 25 November 1998 and 26 November 1998, Orders received telephone calls from Mr Waters of Bizwear, in which Waters expressed interest in stock associated with contracts and stock with logoes. He also wished to discuss purchase of Coles stock. Orders informed Waters that he could not guarantee an assignment of the contracts. He invited him to view the stock and stated that he would accept the highest offer received.

The plaintiffs submitted that Orders' evidence of his conversations with Mathews and Waters of Bizwear should be rejected. Quin had made file notes of similar conversations with the same persons on the same days. The plaintiffs argued that it was improbable that both Orders and Quin had had similar conversations with those persons on the same days, and that Orders had reconstructed the conversations from Quin's file notes.

Mr Orders, however, testified that his conversations occurred, although the file notes had refreshed his memory. He stated that he discussed the auction with Mathews as "the decision to go to auction, for any company in administration, is a very serious course of action to take. I would never leave that decision to a manager to resolve with an auctioneer, I would have to be involved in that decision making."

Further, he testified that "It's not uncommon for ... an interested party to speak to one of my staff and also speak to me, it's not uncommon." In relation to the telephone calls with Mr Water of Bizwear, Orders stated "[Waters] may have rung up asking for me, and David Quin answered the phone and took the substance of the phone call. I didn't know but I ended up speaking to him." I accept Mr Orders' testimony on the relevant conversations.

Orders testified that from the date of deciding to auction the stock until the auction itself, efforts to sell to competitors or to customers continued. Orders' policy was to withdraw stock from auction for sale if it were cash flow positive and in excess of auction value. He invited John Burnes, Deanne Hespe and others to sell stock at any price above the estimated auction value, in return for a 10% commission.

At a glance

Court

Decision date

Before

Source

Judgment (617 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (10)